Title: The effect of price escalation

on project performance: The case of

Afro Genet Building construction
project, Addis Ababa

Sample Research paper

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 Chapter 1: Introduction
• Background of the study
• Statement of the problem
• Objective of the study
• Research questions
• Significant of the study
• Scope of the study

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 Background of the study:
• The industrial sector is one of the most important sectors in terms of its contribution
to the GDP. The industrial sector encourages investment in infrastructure and
innovation. According to Lucas (1990), the industrial sector is considered an essential
driver of economic growth and development. The importance of industry to the
economy is evaluated by the value contributed by the sector as a percent of GDP. The
industrial sector contributed to the Ethiopian GDP by 22.6% in 2018, with a growth
rate of 12% (The World Bank, 2022). This indicates that there is significant potential
for the industrial sector to grow more and contribute to the economy. Industries
include mining, manufacturing, construction, power, water, and gas. Among the
sectors, the construction sector's contribution to the GDP is the highest. According to
the Greenwich (2021) study, construction contributed 78% to the industrial sector.
The sector contributes to the economy by creating new job opportunities and by
responding to the increasing demand for housing. To meet this demand, the
government of Ethiopia encourages investors to build multi-purpose buildings. The
multi-purpose building includes rooms for shops, offices, and apartments. Since
2020, 800 developers have registered at the Addis Ababa bureau of investment.
However, recently, the sector has been facing many challenges. According to a recent
study by UN Habit (2021) forecast, the cost of building a house will increase by 400%
in 2023 compared to the year 2015. Although multi-purpose building construction
has a lot of benefits, the continuous increase in construction prices has become a big
challenge for the sector. This study investigated the effect of price escalation on
project performance by taking the case of the Afro Genet Building construction
project in AA. The Afro-Genet Building construction project was formed by 40
developers in 2021 with the aim of solving the housing problem at the center of
Addis Ababa around Gofa.
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 Statement of the problem:
• Multi-purpose building construction has an abundance of benefits for the country's
economic development. According to a recent study by the Ministry of Construction
(2021), since 2015 more than 300 projects have been under construction. However,
according to the same study, most of the projects are not yet completed, though their
project life time was till 2020. The survey showed that only 10 projects were able to be
completed on time. Addis Ababa Bureau of Industry (2022) reported that only 2% of
construction developers are able to meet project deadlines. This delay in the multi-
purpose building's construction is exposing owners to additional costs. The report
showed that, because of the delay, more than 100 construction project owners were
forced to fire their 30,000 employees. According to the CSA (2021) report, the number
of employees in the construction sector decreased from 30% to 15% between 2021 and
2022. This increase in unemployment will have a socio-economic impact on society.
Moreover, according to the World Bank (2022), the industry sector's contribution
decreased to 12% in 2021 from 22.6% in 2018. As a result, construction projects are
unable to meet rising housing demand while also creating job opportunities. The
service sector is also affected by the construction sector operators due to the decrease
in demand for their products. According to the 2022 CSA report, the service sector has
also shrunk by 18% in the past three years. The main solution to meeting rising housing
demand and creating urban jobs is a clear understanding of the impact of construction
material prices on project performance. There are a few studies regarding the
determinants of project performance (Abebe, 2021; Almaz, 2020; and Mulat, 2019).
However, those studies didn't give attention to price escalation's effect on project
performance. To the researcher's knowledge, there are no recent studies that
demonstrate the effect of price escalation on construction project performance. Hence,
this study, using primary and secondary data on construction materials costs,
investigated the effects of price escalation on project performance using mixed
research methods. [email protected] 4
 Objectives

• The general objective of this study is to investigate the

effect of price escalation on construction project
performance by taking the case of Afro Genet
construction project.
The specific objectives include
• To measure the project performance of Afro Genet
construction project
• To measure price variation in construction inputs
• To investigate the effect of price escalation on project
performance
• To identify the major challenging factors that hinder in
exceling project performance
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 Research Questions
• What was the project's performance in terms
of time and cost?
• To what extent do the prices of construction
inputs vary?
• To what extent do variations in the price of
project materials affect project performance?
• What are the major challenges in achieving
project performance?

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 Significant of the study
• This study will have the following benefits:
1. To the Afro Genet and other similar project
developers by identifying the main inputs that
contribute negatively to the project's performance.
2. To Addis Ababa housing bureau and government
offices: it helps policymakers intervene in the
provision of those materials as the sector has a
significant impact on housing, employment, and GDP.
3. To the researchers: It will help other researchers by
being a good reference material.

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 Scope and delimitation :

• The project is limited to the Afro-Genet

construction project in Addis Ababa. This project
was selected because it is one of the biggest
mixed-building constructions in Addis Ababa and
the information collected from this project can
help to generalize for other similar projects.
Besides, the project uses 25-month data on the
price of construction materials and on the
project's profitability. In terms of concept, the
paper focuses on price-related factors of project
performance determinants.

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 Chapter 2: Literature review

• Theoretical literature
• Empirical literature
• Conceptual framework

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 Theoretical literature
Concept and definition: the following will be defiend
based literature
 project performance
Price escalation
Theoretical literature: The following will be discussed
using literature
Project performance
contingency theory
Full cost pricing and construction materials
valuation of variation in construction
Multi-purpose projects

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 Empirical literature
• According to the study by Ali (2021), entitled
"The Impact of Construction Costs on Project
Delays," steel prices are the major
determinant for the poor performance of
projects operating in Ghana. Another study
found that the increase in petroleum is
affecting the performance of projects in
landlocked countries. ………….

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 Conceptual framework
• Based on the theoretical and empirical
studies, the paper developed the following
framework to see the link between the price
of construction materials and project
performance.
Sand

SPI and CPI

Steel

Ukraine crisis

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 Chapter 3: Methodology
• Research design: The research used both descriptive and explanatory
research to understand the relationship between construction material
cost and project performance.
• Type of data: The study will use both primary and secondary data. The
secondary data used the 25-month record from the company regarding
the price of different construction materials and the project performance
tracking record. On the other hand, primary data was collected from the
project manager to understand the main cause of lower project
performance.
• Data Collection methods: For the primary data, interviews were
conducted with the project managers and bureau of Addis Ababa housing
and with importers and retailers of project construction materials.
• Method of analysis: descriptive, econometric, and qualitative methods
were used in the study. For the econometric model, the study used
ordinary least square (OLS) model. This model was selected because the
dependent variable, project performance, as measured using CPI and SPI,
is continuous. The independent variables used in the study include the
price of cement, steel, sand, price of petrol, price of labor, and Ukrainian
crises.
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 Summery of Method of analysis
Objectives Data Methods of analysis
To measure the project performance Secondary Descriptive
of Afro Genet construction project

To measure price variation in Secondary Descriptive

construction inputs

To investigate the effect of price Secondary Econometrics: OLS model

escalation on project performance

To identify the major challenging Primary Qualitative

factors in exceling project
performance

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 Data collected
spi cpi priceofpetrol ukraincrisis sand steel
0.01 0.001 1 1 700 125
0.02 0.002 1 1 6000 123
0.03 0.003 1 1 6500 121
0.04 0.004 1 0 17000 119
0.05 0.005 1 0 8200 70
0.06 0.006 1 0 7600 115
0.07 0.007 1 0 7700 80
0.08 0.008 1 0 7750 111
0.09 0.009 1 0 7800 109
0.1 0.01 1 0 8000 107
0.11 0.011 1 0 8100 60
0.12 0.012 1 0 14000 16
0.13 0.013 1 0 8300 101
0.2 0.1 0 0 8400 16
0.3 0.2 0 0 8500 99
0.4 0.3 0 0 9000 95
0.5 0.4 0 0 7400 93
0.6 0.5 0 0 9500 93
0.7 0.6 0 0 10000 89
0.8 0.7 0 0 7200 87
0.9 0.8 0 0 16000 80
1 0.9 0 0 17000 100
1.1 1 0 0 18000 81
1.2 1.1 0 0 19000 79
1.3 1.2 0 0 25000 60
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 Chapter four: Data analysis and
discussion
• This section discussed the main findings of the
study. The main objective of this paper was to
identify the construction price materials
impact on the project performance. The study
used descriptive, inferential and econometrics
model to achieve the objectives.

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 Description of variables
• The main variables used in this study
presented as follows:
Variables observation mean sd min max
spi 25 0.3964 0.42493 0.01 1.3
cpi 25 0.31564 0.408764 0.001 1.2
pr 25 0.35602 0.416634 0.0055 1.25
sand 25 10506 5337.335 700 25000
steel 25 89.16 28.66717 16 125
category Number percent

Ukrain crisis Yes 3 12

No 22 88

Nb: We use sum for continuous and tab for the category variable. In addition we have
measured project performance variable using spi and cpi using gen pr= (cpi+spi)/2

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 Price variation of sand
25000
20000
10000sand15000
5000

0 5 10 15 20 25
time

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 Price variation of steel
• dx
120
100
80
Steel

60
40
20

0 5 10 15 20 25
time

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 The relationship between project
performance and price of petroleum
• The following table shows that the p value (0.000) is
below 10%. Hence, it is possible to conclude that
there exist significant relationship between project
performance and price of petroleum
. tab perf priceofpetrol , chi2

Price of Petrol
perf 0 1 Total

0 4 13 17
1 8 0 8

Total 12 13 25

Pearson chi2(1) = 12.7451 Pr = 0.000

Nb: perf variable was generated using the command gen perf = (spi+ cpi)/2 >0.5.
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 Mean test
• The right side p value test is below 10%. Hence, we
can interpret the result as:
• The average performance of the project before the
outbreak of the Ukrainian crisis is significantly higher
than before the outbreak by 0.392.

. ttest pr, by( ukraincrisis)

Two-sample t test with equal variances

Group Obs Mean Std. Err. Std. Dev. [95% Conf. Interval]

0 22 .4030682 .0902155 .4231483 .2154547 .5906816

1 3 .011 .0031754 .0055 -.0026628 .0246628

combined 25 .35602 .0833269 .4166343 .1840418 .5279982

diff .3920682 .2488513 -.1227199 .9068563

diff = mean(0) - mean(1) t = 1.5755

Ho: diff = 0 degrees of freedom = 23

Ha: diff < 0 Ha: diff != 0 Ha: diff > 0

Pr(T < t) = 0.9356 Pr(|T| [email protected]
> |t|) = 0.1288 Pr(T > t) = 0.0644 21
 Correlation
• There is significant correlation between price of
petrol and spi (with a p value 0.000) and the
level of correlation is negative and weak (-0.81)
. pwcorr spi cpi priceofpetrol ukraincrisis pr sand steel, sig

spi cpi priceo~l ukrain~s pr sand steel

spi 1.0000

cpi 0.9980 1.0000

0.0000

priceofpet~l -0.8160 -0.8021 1.0000

0.0000 0.0000

ukraincrisis -0.3338 -0.2892 0.3548 1.0000

0.1029 0.1609 0.0818

pr 0.9995 0.9995 -0.8096 -0.3121 1.0000

0.0000 0.0000 0.0000 0.1288

sand 0.7451 0.7430 -0.4429 -0.4312 0.7444 1.0000

0.0000 0.0000 0.0266 0.0314 0.0000

steel -0.2238 -0.1915 0.2791 0.4449 -0.2081 -0.3393 1.0000

0.2821 0.3592 0.1766 0.0259 0.3183 0.0970
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 The effect of price escalation on
project performance
• The study identified project performance as
dependent variable and price of sand, steel and
Ukraine crisis as the main independent variables. The
regression table is given as follows.
. reg pr sand steel ukraincrisis

Source SS df MS Number of obs = 25

F(3, 21) = 8.78
Model 2.31829467 3 .772764889 Prob > F = 0.0006
Residual 1.84772415 21 .087986865 R-squared = 0.5565
Adj R-squared = 0.4931
Total 4.16601882 24 .173584118 Root MSE = .29663

pr Coef. Std. Err. t P>|t| [95% Conf. Interval]

sand .0000592 .0000128 4.63 0.000 .0000326 .0000858

steel .0007742 .0023987 0.32 0.750 -.0042141 .0057625
ukraincrisis -.0108581 .2161516 -0.05 0.960 -.4603699 .4386537
_cons -.3339837 .2772859 -1.20 0.242 -.9106313 .2426639

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 Interpretation of the regression result
• The group test, with a p value of 0.0006,
showed that all independent variables
significantly affect the dependent project
performance. This is also evidenced by the
goodness of fit test result of 55.65%. The
goodness of fit test showed that 55.65% of the
variations in the project performance
occurred due to the variations in the
independent variables.
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Interpretation of the regression result
• The individual test result showed that only
price of sand is the main determinant factor
for project performance. Other variables
found to be insignificant
• The coefficient of the variable sand can be
interpreted as, when the price of sand
increase by 1 birr, project performance
increase by .0000592 units.

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 Post estimation test: multicollinearity
test
• The mean vif is below 10, hence there are no
multicollinearity problem
. vif

Variable VIF 1/VIF

ukraincrisis 1.40 0.713341

steel 1.29 0.775335
sand 1.27 0.786962

Mean VIF 1.32

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 Post estimation test:
heteroscedasticity test
• The p value is above 10% (19.5%), and we can
conclude that there is no heteroscedasticity
problem.
. hettest

Breusch-Pagan / Cook-Weisberg test for h

> eteroskedasticity
Ho: Constant variance
Variables: fitted values of pr

chi2(1) = 1.68
Prob > chi2 = 0.1955

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Post estimation test: Omitted variable
test
• The p value is higher than 10% (70%), hence
the data has no omitted variable problem

. ovtest

Ramsey RESET test using powers of the fitted

> values of pr
Ho: model has no omitted variables
F(3, 18) = 0.47
Prob > F = 0.7037

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 Post estimation test: link test
• The p value of hatsq is above 10% (41.9%),
hence, there is no model specification
problem
. linktest

Source SS df MS Number of obs = 25

F(2, 22) = 14.57
Model 2.37364672 2 1.18682336 Prob > F = 0.0001
Residual 1.7923721 22 .081471459 R-squared = 0.5698
Adj R-squared = 0.5307
Total 4.16601882 24 .173584118 Root MSE = .28543

pr Coef. Std. Err. t P>|t| [95% Conf. Interval]

_hat .5871459 .5348109 1.10 0.284 -.521984 1.696276

_hatsq .4059081 .4924521 0.82 0.419 -.615375 1.427191
_cons .0578948 .1124575 0.51 0.612 -.1753277 .2911173

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 Post estimation test:
• The Shapiro-Wilk test for the normality of
error term also proves that there is no
problem as the p value is higher than 10%
(0.16.7).

. swilk e

Shapiro-Wilk W test for normal data

Variable Obs W V z Prob>z

e 25 0.94235 1.602 0.963 0.16768

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 Major challenging factors that hinder
in exceling project performance
• The interview results with different
stakeholders are discussed one by one...
• According to the project manager of the Afro
Genet project, the following are the major
challenging factors …
• Expert from Addis Ababa housing bureau, the
main reason for the poor performance of
construction projects in Addis Ababa are ….

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Conclusion and Recommendation

Thank You
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